Documentary Risk in Commodity Trade Part 4

Main Documents Used in International Commodity Trade

Documents are the key issue in a letter of credit transaction. Banks deal in documents, not in goods. They decide on the basis of documents alone whether payment, negotiation, or acceptance is to be effected. If proper documents are presented, banks will make payment whether or not the actual goods shipped comply with the sales contract.

Thus, special attention has to be given to the correct list of documents since a slight omission or discrepancy between required and actual documents may cause additional cost, delays and extra work for both buyer and seller and may prevent the merchandise from being exported. This can result in the exporter not getting paid, or even in the seizure of the exporter's goods by national or foreign government customs. Even before the letter of credit is issued the buyer and seller should clearly decide on the documents that are needed for the accomplishment of the sale transaction. The letter of credit should precisely state the documents required and their contents. As to the documents that accompany a letter of credit, they depend primarily on the requirements of exporter's and importer's governments. The size and composition of the documentation are greatly influenced by the nature of goods, type of transport, destination of shipment, and delivery terms. The UCP guidelines specifically describe transport documents, insurance documents and commercial invoices. As to the other documents, they are treated on a general basis only.

It should be noted that many international commodity transactions are performed by transfer of title rather than the physical delivery of the merchandise (e.g. the case of cocoa and coffee). Title to goods is hence conveyed by a set of shipping documents, one of which is the bill of lading. It is, therefore, very important to have shipping documents which conform in all respects to the sales contract established between the parties and to have the merchandise delivered on time and in good quality.

It is very important to fully understand the various aspects of documentation (including costs and risks) in order to avoid unnecessary delays and to ensure that the proper trading process, with the associated costs, is incorporated in the invoice price of the products shipped. Failing to get the documents, right on time, can have serious financial repercussions on the traders. Not only will additional administrative costs be incurred to amend the credit or to extend its time limit but unexpected additional costs will be added to the final cost of the letter of credit transaction to cover preparation of the revised documents and to pay other interest charges for delays (such as credit insurance cover, and banks’ indemnities in case of non-payment).

Commercial Invoice

The commercial invoice is one of the most important documents in the letter of credit. It is the one and only document that describes the entire transaction from the beginning to the end. The commercial invoice is necessary for both the seller and the buyer. With the commercial invoice, the seller confirms that goods have been delivered as contracted and therefore has the right to claim payment, provided that all information, payment terms, and commodity descriptions correspond exactly with the letter of credit instructions. On the other hand, the importer needs the commercial invoice for customs clearance since it is often used by customs authorities to assess duties.

The commercial invoice acts as a bill (accounting document) provided from the seller to the buyer, giving a complete description of the goods and its price, terms and currency of the transaction, the name and addresses of seller and buyer, the buyer’s purchase order number or reference number for the transaction, and the tariff classification used by the buyer’s country. Separate pricing for shipping and insurance should be attached to the base price when needed, as should the country of origin of the goods.

The commercial invoice is the primary document used worldwide for customs identification, classification, duty/tax assessment, and final approval of entry of the goods. Accurate descriptions are important to accomplish customs clearance and assess customs duties, facilitate customs procedures for commodity control, valuation and the clearance process.

The commercial invoice is the document that confirms the value of goods for insurance purposes. The commercial invoice value can never be stated as a lesser value than the insured amount.

Many exporters, both new and experienced, find it sometimes very difficult to prepare a commercial invoice. They have trouble in identifying the necessary information and in knowing whether a special type of invoice such as a consular invoice is required. However, there are some specific areas that should be examined to ensure that the transaction proceeds properly:

• The commercial invoice should be set up in a very complete and comprehensive manner. All information should be clearly defined. Special attention should be given to the terms of sale, as they define the responsibilities of the seller and buyer. Terms of sale should also clearly indicate the point at which the risk of loss is transferred from the seller to the buyer.
• In preparing the commercial invoice, the seller should be very conscientious, because any mistake or lack of information can lead to unnecessary extra costs and delays (for instance, an incomplete address may lead to delays in document delivery, if the delivery address is not correctly stated, or not stated at all, delivery is then consequently delayed. Moreover, if the carrier and date of shipment are not stated, difficulties and delays will occur to trace the consignment). The seller should also check with his buyer on whether particular requirements are needed for tax payment on importation (e.g. a tax reference) or other information needs to be disclosed on the invoice.
• It is crucial that the information contained in the commercial invoice coincide with the instructions in the letter of credit. Therefore, a modification of the normal descriptions of the merchandise, to comply with those in the letter of credit, may be required.
• It is important that the description of the goods be clear and accurate. An accurate description of the goods will help the buyer to check the invoice and price the goods for sale, and allow the customs to clearly identify and classify the products for entry into their country. In addition, in most cases, commercial invoices are translated by the customs broker or freight forwarder for customs clearance purposes and an appropriate product identification and description must be presented to have a proper translation.
• In order to avoid delays in payment, the customer’s order number should be notified on the invoice. If no number is quoted, the name of the person placing the order and the date when the order was issued should then be mentioned. This will allow the buyer to quickly identify the specific transaction.
• If the currency used for the invoice is not stated, confusion will arise and will lead to additional costs to the exporter.
• The Free On Board (FOB) value of the invoice should be separately mentioned in order to allow for a proper calculation of import duties and taxes, avoiding misunderstandings and extra import tax to the importer. It should be noted that different countries have different rules in calculating import duties and taxes. Therefore, it is always useful to provide useful and detailed information on the various costs in order for the customs authorities in the importing countries to set an accurate value. It is extremely important that, based on the terms of sale, all costs be separated to show specific charges for such items as; freight charges, transportation, insurance, packing etc. If, for instance, the terms of sale go beyond Ex Works (EXW), the base price of the goods must be shown with the various additional costs involved such as packing, insurance, transportation and related costs listed separately. This clearly indicates what costs are being added to bring the final price of the merchandise up to the indicated terms of sale.
• It is usually recommended that an exporter provide a minimum of three signed and dated copies of the commercial invoice; one for himself to process the shipment, one to the buyer, and one to customs officials in the importing countries.
• In many cases countries may require specialized forms of invoices (known as consular invoices) for imports into their country. A country might require a Consular Invoice to control and identify goods. In most cases the consular invoice would be purchased from the Consulate of the import country. Usually, the invoice must be prepared in the language of that country. In many cases these invoices also have to be legalized and certified by the Consulate and/or Chamber of Commerce of the country involved. If a Consular Invoice is required, it is advisable for the exporter to utilize the services of a forwarder and/or a consular service specializing in the preparation of these invoices.

Packing List

The packing list is a complementary document to the commercial invoice. It provides relevant information to the buyer, shipping line, banks and foreign customs authorities. In most cases, a packing list is specified in a letter of credit as a required document to be submitted.

A packing list notes the size, type, number of packages, and content of the shipping container and, especially, net and gross weight in pounds and kilograms; all these are essential information hence, providing it can be indispensable to the successful completion of the exporting process.

Even though a packing list is not required by the customs law of every country, it is nevertheless used by some customs to check against the bill of lading or commercial invoice for inconsistencies and contradictory information. Packing lists come in various formats, all with the same basic functions; to confirm the contents of a shipment as it left the exporter’s premises, and to indicate the weights, measures, number packages in that shipment and how it is carried i.e., box, cartons, etc.

When a consignment consists only of one simple product in a standard pack, it may be possible to include the packing information on the commercial invoice. However, it is always recommended to provide a separate packing list in order to have the packing information separated from financial information on the invoice.

The packing list is useful to the carrier/shipper when deciding how to load the consignment (safety precautions). It is useful to the customs authorities in carrying out their inspection. It would provide an accurate summary of each container, thus saving time in the clearance process. To the buyer, packing list is useful in identifying the content, volume and weight of what has been shipped with reference to the original order, thus allowing to note any shortages or discrepancies.

A good packing list is not easy to prepare. One must successively number each carton, list its contents and gives its net and gross weight (and for some countries, legal weights, i.e. the weight of the goods and their immediate packing). Packing information (i.e. cubic dimensions and shipping marks) and relevant data must also be properly provided:

• Before setting up the packing list, it is important for the buyer and seller to clearly understand the physical properties of the commodity being shipped, its value, and the voyage it must undergo. In packing the commodities for export, the shipper should be aware of the exigencies that exporting puts on a package and must comply with statutory requirements to ensure proper reception of all the merchandise. Four problems must be kept in mind when an export shipping pack is being designed; breakage, weight, moisture, and pilferage. Since proper packing is essential in exporting, often the buyer specifies packing requirements. For both ocean and air shipments, freight forwarders and carriers can advise on the best packaging. Marine insurance companies are also available for consultation. Finally, because transportation costs are determined by volume and weight, special reinforced and lightweight packing materials have been devised for exporting. Care in packing goods to minimize volume and weight while giving strength may well save money while ensuring that goods are properly packed.
• The packing list should state the invoice reference and the date of the invoice otherwise it may be difficult to match the documents if they are separated.
• Additional charges may occur if the total gross weight of the consignment is not clearly separated from the net weight of the consignment.
• It is essential, as well, to specifically define the content, gross weight, size and outside measurement of each container (either in cubic feet or meters). It should be stated how goods are packed and whether special handling is required. When doing so, it is also required to give each container a specific and corresponding number. This task needs to be coordinated with those who will be physically packing the goods in order to insure an accurate summary of each container, its corresponding number and, of course, specific contents.
• An important element of the packing list that is often overlooked is the "marks and numbers". It is a shipping term that refers to the way in which the consignment is addressed and numbered. The exporter should not omit to specify the address exactly as it will appear on each shipping unit. The term “fully addressed” is used when each package is labelled with the full name and address of the consignee. As to the numbers specified in this section, they should correspond to those listed against individual items.
• The packing list should be duplicated in the language of the foreign destination.
• In addition to information, a properly prepared envelope is also a determinant in facilitating the shipment since it protects the packing list document while the cargo is in transit. As an essential element of the shipment, the envelope must be securely attached to the cargo itself. As the shipment will pass through many hands on its journey, the envelope must be such that it will remain attached and can be resealed despite handling, weather and a variety of adverse conditions.
• An accurate packing list can identify what has been damaged or is missing from a shipment and, therefore, can facilitate the insurance claims procedure. It also facilitates cargo inspection.

The physical condition (i.e. whether liquids, gases, or solid form), quality and quantity of a product to be shipped is one the main components determining the choice of transportation. For instance, liquids and gases cannot be transported unless they are carried in appropriate vessels. Therefore such cargo has to be either contained in drums, flasks, tanks, etc. or be shipped in special vessels with specific structure and requirements to match the requirements of the merchandise to be shipped (e.g. perishable goods require refrigerated holds and specific liquids may require tanks with heating coils). On the other hand, the size of shipment and quality will determine whether it is more appropriate and less costly to transport the shipment as bulk cargo, break-bulk cargo, or general cargo.

If the product is homogeneous in terms of quality, grade and other technical specifications then it can be carried in bulk cargo (i.e. loose form), without any packing (and transported as full or part shiploads). Large quantities of products with homogeneous characteristics constitute full cargo. Such products include crude oil, most solid minerals (coal, iron ore, manganese, bauxite, etc.), food products (rice, wheat, maize, tapioca, vegetable seeds/oils, salt, etc.) and some chemicals in solid liquid form. It should be noted that different types of cargo can be carried by the same ship where each cargo can be stocked in a different zone on the ship.

If the merchandise to be shipped in bulk cargo is too little in relation to the space available in the bulk cargo vessel, then it is more economical to have the merchandise shipped in break bulk packed in drums, boxes, cases, casks, crates, etc. Break bulk refers to the process of unitizing bulk cargo to make it suitable for shipment as general cargo.

If a variety of products with different characteristics and features is to be shipped on the same vessel then it can be carried in general cargo, with packing requirements. This type of shipment is generally used for most manufactured goods.

Bill of Lading

The bill of lading is one of the most important documents in international trade in relation to shipment. It is a document that conveys title to goods, and proves that goods are loaded on board the vessel, complying with all conditions and packing for shipment.

The bill of lading has three basic functions; an evidence of the contract of carriage (i.e. contract between the carrier and the shipper for the transportation of the goods), a receipt issued by the carrier to a shipper for goods received for transportation, (i.e. a proof of delivery of the goods on board the vessel) and most importantly, evidence of title to the goods (the bill of lading, representing the physical cargo, proves ownership of the goods in case of dispute and when transferring rights to the goods in transit by the transfer of the paper document to another party).

The bill of lading has to be prepared exactly in accordance to what has been said in the letter of credit. Once this is achieved and shipment is made, the seller can turn to the negotiating bank with the bill of lading and all the necessary documents for payment. If everything is correct payment can be made. The bill of lading is then endorsed, conveying title of goods, and forwarded to the consignee, who can take delivery of the shipment.

The bill of lading has been adapted to serve different modes of transportation. Its latest is to be used for intermodal/multimodal transportation. However, the success of achieving a proper trade transaction can be facilitated and accelerated with a precise completion of the bill of lading, whether for ocean, air or land:

• Bills of lading are usually required to be presented along with other documents when a letter of credit is negotiated. They must be prepared exactly in accordance with the credit or a discrepancy will occur and delay payment.
• It is important to remember that the bill of lading represents the actual goods, therefore, great care must be taken when issuing a bill of lading; they have to be issued in conformity with the Mate’s receipts, i.e. showing the actual condition of the cargo (number of pieces and/or weight must be correctly indicated, and any damage to the cargo must be shown on the bill of lading).
• The bill of lading may also contain the terms of carriage (i.e. the carrier’s conditions of carriage), if no charter party agreement has been signed. If a charter party has been negotiated then the charter party would govern the terms of carriage. This is because the charter party would represent the actual contract between the ship-owner and the shipper. There is a convention that governs bills of lading which is the Hague rules (or the new Hamburg rules). These rules apply only to bills of lading but need to be referred to in the charter party in order to cover the bill of lading.
• Normally each shipping company provides its own blank bill of lading forms, which have to be filled in either by the shipper himself or by the forwarding agent. Bills of lading are issued in sets of two to four identical originals and when completed serve as the right document of title to the goods. However, only one holder will be given the goods at destination, depending on how the bills are made out. The number of originals in the set must appear on each document. Although only one original is needed to obtain delivery of the goods, it is recommended to have the full set of originals in order to have complete control over the goods. The bill of lading conveys ownership right to the goods, and, by consignment of the merchandise, the bill of lading can be made negotiable. This allows the holder of the bill to hold his rights on the merchandise or to transfer the title or ownership of the shipment to another party. This is possible only with ocean and inland bills of lading, air waybills cannot be negotiable and, therefore, do not serve the same purpose (with an ocean bill of lading, it should be consigned to the order of the shipper and blank endorsed).

If the bill is a straight bill of lading, i.e. made out to a named consignee, then only the consignee can take delivery of the shipment. A transfer of ownership can be made through a declaration of assignment.

If they are made out to order, then the party to whom they are endorsed with the words “delivered to...” or “to the order of...” has the right to take delivery. This type of bill can be transferred by the consignee by simple endorsement. Thus, it is important to repeat that a bill of lading has to be endorsed prior to surrender if it is payable “to the order of...” in order to obtain merchandise.

• It is very important to clearly state the destination of the merchandise (whether it is a port of discharge, airport destination, or address for inland movements). What is written on the bill of lading will lead to the discharge destination of the goods. The accuracy of what is written on this document is very important since a mistake here would be very costly, because a cargo is very difficult and practically impossible to move once it has been discharged in a particular area. It becomes even more difficult when a cargo is stowed with other cargoes in a container for a given destination. The discharge destination should be checked very carefully, and any inconsistency must be checked prior to preparation of the document.
• The method of transportation is usually specified by the type of bill of lading that is used for the transaction. When an intermodal application is used, all the combinations and types of bill of lading that are covering the transaction (whether in land, ocean or air) should be mentioned on the forms used for export documentation.
• In order to determine the tariff and the total cost of the movement of the goods, it is very important to have a clear and accurate description of the freight (exact weight and proper measures). Any particular information which will enable the carrier to apply a tariff has to be mentioned.
• It is also important to mention in the description of the goods if any special requirements, exist, particularly in connection with hazardous goods. Special stowage (cool, frozen, fragile, etc.), special handling, or any other requirements should also be mentioned in the bill of lading in order to facilitate proper stowage and offloading. Packages, if any, should be numbered to assist the carrier in identifying all the merchandise. Similar to the packing list, the number of packages should be mentioned to indicate to the carrier how much merchandise is being transported and how to handle it. The bill of lading should also indicate if the freight is to be prepaid or collected upon arrival of the goods at destination.
• The bill of lading should be issued by the carrier with a “Clean” indication on the bill, which means that the goods were received by the carrier in "apparent good order and condition," without damages or other irregularities. A “Foul” bill of lading indicates that the goods were damaged when received.
• To sum up, the bill of lading must meet all the requirements of the letter of credit, otherwise discrepancies will occur and payment will be delayed. The document issued on behalf of the carrier should clearly state the kind and quantity of goods being shipped, the name of the shipper, the consignee, the party to be notified, the ports of loading and destination, and the name of the carrying vessel (if the place of receipt and place of delivery is different from port of loading or unloading, then it should be mentioned). The description of the goods, including weights or measures, number of bags as well as shipping marks and container numbers, must conform to those specified on the other documents. The document should also state whether freight has been paid or is payable at destination. It must be dated before the latest date for shipment that is specified in the letter of credit. It must specify the number of originals of the bill which have been issued. Finally, the bill of lading should have the actual name of the carrier and be signed by either the carrier or a named agent signing on his behalf.

In recent years, bills of lading have been frequently replaced by non-negotiable documents such as “sea waybills”, “liner waybills”, “freight receipts”, etc. These documents are similar to the in land (Inland bill of lading) and air transport (Air waybill) bills of lading which have been used for many years. These non-negotiable documents are simpler to use and provide considerable ease in documentary practices. They fulfil the same functions as a bill of lading except for title to goods. If the buyer wishes to sell the goods in transit he needs to have a bill of lading. However, when the contracting parties know that the buyer does not want to sell his goods in transit, they may agree that the seller use a non-negotiable document which would facilitate the delivery procedure of the goods. When using a non-negotiable document the carrier does not need to surrender the original before delivering the cargo to a consignee; the carrier only needs to properly identify this party.

Major Types of Bills of Lading

Straight bill of lading - Provides for delivery of goods to the person named in the bill of lading which is usually the consignee (buyer/importer) who needs only to identify himself to claim the goods (the shipper will deliver the goods to the consignee). The document itself does not give title to the goods. It is often used when the goods have been paid for in advance (open accounts). A straight bill of lading has to be marked “non-negotiable”.

Order bill of lading - This document gives title to goods. A shipper’s order bill of lading can be bought, sold, or traded while goods are in transit and is used for many types of financing transactions. It provides delivery of goods to the person named in the bill of lading. It must therefore be in the hands of the consignee in order for him to take possession of the goods being shipped. Because this bill of lading is negotiable, it is usually made out "to the order of". A shipper’s order bill of lading usually applies for shipment against a letter of credit to ensure proper payment on collection documents. It enables the bank involved in the export transaction to obtain title to the goods if the buyer defaults. The bank does not transfer title to the goods to the buyer until payment is received. The bank does not transfer payment to the exporter until the conditions of the letter of credit have been complied with.

Air waybill - A bill of lading issued for air shipment of goods, which is always made out in straight non-negotiable form. It serves as a receipt for the shipper and needs to be made out to someone who can take possession of the goods upon arrival - without waiting for other documents to arrive. Once the shipment commences, the exporter/shipper and the bank lose title to the goods.

Sea waybill (“non-negotiable”) - A non-negotiable document that allows the consignee to claim the goods directly from terminal, overcoming the delays of waiting for the bill of lading to get signed.

Through bill of lading - This document is basically used for multimodal transportation (i.e. a single bill of lading used for two or more modes of transportation), where the multimodal carrier assumes the responsibility for the entire shipping movement of the cargo, i.e. from factory to final destination.

Overland/Inland bill of lading - Similar to an Air waybill, except that it is used in ground or water transport.

Bills of lading do not necessarily signify that goods are actually loaded on a ship (or plane, or train); in effect, most of the above bills of lading come in different forms:

Shipped on board - A “shipped on board” bill of lading is a receipt that is signed and dated by the master or carrier evidencing that the goods are loaded on board or shipped on a named vessel.

Received for shipment - A “received for shipment” bill of lading is simply a receipt for the goods to the shipping company. To be acceptable under a documentary credit, this type of bill of lading must bear a separate notation indicating the date that the goods were actually shipped on board the carrying vessel. If the goods were received at a different place to that required by the credit, the “on board” notation must also name the actual port of loading and the carrying vessel. The date when the goods were actually shipped on board of the carrying vessel has to be stipulated.

Charter party - Charter party bills of lading do not contain full conditions of carriage; these are detailed in a separate charter agreement. Bills of lading of this type are not acceptable unless specifically allowed in the credit.

What Happens if the Ship Arrives before the Documents?

There are basically three possibilities:

Wait for bill of lading to arrive - The ship Master will not release the cargo without the bill of lading. This is an expensive solution.

Deliver the goods to a reliable warehouse - The ship Master will release the cargo to a reliable warehouse (usually in the port) until the bill of lading arrives. However this solution depends on the country’s regulations because in some countries one has to provide a financial guarantee (a deposit) in order to be able to have the goods delivered to a warehouse. This is a less expensive solution compared to the first one but the consignee still has to pay for storage and all other charges. The consignee would not get the cargo until he pays all charges.

Deliver the goods against a letter of indemnity - The letter of indemnity is used to replace a bill of lading’s delivery function. The letter of indemnity can be used as a means to collect the cargo from the ship-owner at the port of discharge without presentation of the bill of lading. The LOI’s price statement covers not only the price of the goods but also the costs and consequences to compensate for carrying out a possibly illegal act (in order to be safe, the LOI coverage can sometimes be double the value of the cargo or be even illimited). Banks will generally issue these LOI but require a guarantee against the issuance of such a document; thus, they can cost money and tie up a trader’s credit line for a long time.

Certificate of Origin

Certain countries require a signed statement to attest the origin of the goods being exported. Such certificates are completed by the exporter and can usually be obtained through a semi-official organization such as a local chamber of commerce. The certificates of origin can also be issued by an international commodity organization. The certificate of origin often has to be legalized (endorsed) by the local chamber of commerce or by the local embassy or consulate of the country requiring the certificate of origin. If there is no representative of the importing country in the country of export, then it is necessary to send the document for endorsement to the trade authorities in the importing country, which sometimes can lead to additional delays.

Many nations take into consideration the origin of goods to take decisions on the following:

• Whether the goods may be legally imported into the country,
• Whether the goods are being imported from an embargoed nation,
• Whether the goods fall under a quota system,
• Whether the goods qualify for any preferential treatment under a trade agreement, and
• What specific rate of duty applies?

With the growth and development of the global marketplace, many countries have established trade relationships with specific terms and benefits. Therefore, customs officials need to know the origin of imported goods to accurately assess tariff rates and duties. Even though the commercial invoice contains the information, the certificate may be required to provide further precision as to certain requirements. It is therefore very important to have a complete and accurate certificate of origin that complies with the rules and laws of the importing country:

• The exporter should check with his buyer about the requirements in regard to the certificate of origin, i.e. if a special form is needed, if endorsement is required, the tariff reference and requirements. While there is a general certificate of origin format that is accepted by many countries worldwide, some countries may require specific certificates of origin.
• In some cases, international organizations for commodities (e.g. the international coffee organization, ICO) issue a specific certificate of origin form for an international shipment. The form includes details related to identity, size, origin, destination and time of shipment. These certificates are used to control and regulate the movement of the commodities worldwide and they are also used to enforce quota limits that individual exporting countries may have agreed on. Therefore, exporters should comply with all the regulations of these specific forms.
• The name of the consignee and the consignor, their addresses, shipping details and other general information should be identical to the commercial invoice or other documents (i.e. bill of lading and packing list), otherwise the document will be rejected by the customs authorities.
• If the country of origin is stated incorrectly heavy penalties may be incurred.
• The quantity of goods being shipped should be clearly denoted in the units used in the tariff of the importing country, otherwise there may be delays in customs clearance and extra charges for import duty. On the other hand, it is very important for the description of the goods to be consistent and relevant with that covered by the tariff reference and requirements (the need to show the exact number of pieces/packages or the net and gross weight when making up the consignment).

Inspection Certificate

Most buyers (and countries as well) would require an inspection certificate attesting to the specifications of goods shipped, usually performed by a third party. Third party inspections, if required, are conducted by specialists. Inspection certificates are often obtained from independent inspecting/testing organizations. Depending upon the import government regulations and/or the buyer requirements, inspection may cover verification of quality and quantity, export market price, value for customs purposes, customs classification and import eligibility. The certificates delivered by inspection companies are basically of two different types:

Clean Report of Findings - This is a document required by the importing (sometimes, exporting) country, as some developing countries have a large part or all of their imports (exports) inspected prior to shipment in the country of origin, as to quantity, quality and price (Pre-Shipment Inspection - PSI). These PSI schemes, entrusted to international inspection agencies, have been established by the authorities for custom, fiscal or foreign exchange control purposes and are compulsory.

Commercial Certificate of Inspection - Stating the quantity and quality (any measurable quality parameter requested by the principals). These Certificates are issued by an inspection agency acting as a neutral third party assessing the actual condition of a traded cargo between a seller and a buyer. A commercial certificate of inspection is necessary to build up a long-term relation between buyers and sellers. Bad quality of goods traded can lead to loss of market share in the long run.

Inspections are important tools to reduce trade risks and avoid frauds and abuses of trade incentives. However, these inspections, if required, do have a cost, and it is therefore very important to have a proper inspection with all the necessary and required information to avoid delays and extra charges in concluding the trade transaction:

• Pre-shipment inspection is initiated by the inspection company when the latter receives notice, either from the importing country or the seller, that inspection is required. Such inspections are rarely qualitative but in fact are required in some countries. The physical inspection is normally undertaken in the customs territory of exportation of the goods or in the exporter’s premises when it is possible. Inspection of bulk cargoes is usually carried out at the time of loading. In some cases, it may be necessary for the inspection company to carry out inspections during production or certify tests at the manufacturer’s premises.
• The pre-shipment inspection will cover the verification of quality, quantity, price comparison as well as customs classification and value. Sellers need to be aware of the quality standards of the country to which they are exporting since most countries have their own quality standards, most specifically in relation to agricultural products. It is always recommended that the seller should know in advance the import regulations of the country to which he is exporting to. It is advisable in some cases to contact the inspection company before setting up a contract in order to negotiate the choice of standards and type of specifications. If a country has very rigid and difficult standards, the inspection company could inform the importing country and recommend reference to standards which would adapt more easily to the specific product.
• It should be noted that some associations and authorities require a strict quality control for all shipments. Unfortunately quality standards in a number of countries have been going into retrogression and this has led many buyers to insist on seeing samples of what is actually exported before purchase. For this reason, certain large inspection companies have established pre-shipment quality control offices abroad.
• Quality requirements and standards should be clearly defined in the letter of credit, all parameters must be properly mentioned. However, one should be able to specify what is really needed, too little or too much detail can lead to problems and delays. To avoid problems it is imperative to specify the standards of quality of which it is necessary to take account.
• The scope of services of the inspection company should be clearly defined, one could get the assistance of the inspection company in determining these services. The scope of services vary according to the goods being traded.
• Another important element to consider is the factor of conversion. To obtain the specific weight of a merchandise, one would need in some instances to convert from American to European measures, and this could lead sometimes to misunderstanding or misinterpretation.
• The most secure way to control the merchandise is the door-to-door inspection (i.e. follow the merchandise from the warehouse until is it loaded and again until it is unloaded). This could be very expensive but would provide the best guarantee. However, in general one would rely only on one inspection which would be done either at the loading or unloading stage. Another type of inspection is the quality claim survey which is used by exporters and importers for insurance purposes.
• Place of inspection can be set either in the country of origin (at the time of loading) or in the country of destination (at the time of unloading or at the warehouses where the imported goods are received). Perishable goods, for instance, are verified at arrival to make sure of the state of quality of the merchandise (e.g. fruits are verified at arrival). The import requirements on fruits and vegetables are very strict.
• In the case of crude oil there is less need to accompany a cargo with a certificate. Usually a report is issued to certify the status of the cargo. Measurements are done by weighting the ship in the water and following the official standards. Then a report determining the quantity is issued. Quality control is nevertheless more important than quantity control since most of the disputes arise from this sector. Quality control is done in a special laboratory, commonly before loading. Sometimes it is difficult to undertake such an inspection due to lack of a laboratory or because in the terms of sales it is specified that the analysis is witnessed by a third party. In that case the inspection company witnesses the analysis and the report. Fraud in the oil trade is infrequent because the chain of trade does not allow for it as is the case in agricultural products. The way oil cargoes are traded is very transparent and problems may arise more in reference to the terms of the sales contract rather than in relation to fraud cases or false certificates. If there is any inconstancy in the terms of a sales contract, it is then preferable to check with the other contracting parties for further examinations.
• Generally, inspections are carried out at the request of the buyer as (in most commercial transactions, quality and quantity are determined "final at loading"), he is the "absent party". The nomination of the inspection company may be made by either party in agreement with the other. The degree of inspection is mainly a commercial decision that is influenced by the buyer’s evaluation of the seller. It is relevant for a buyer to name an inspection company but, in any case, the exporter shall not agree to an inspection by the buyer upon receipt of the product as a condition of payment. Nevertheless, it is frequent for a buyer to ask for an inspection of the goods at the time of unloading.
• In the fruit and vegetables trade, as the condition of the goods (quality and quantity) is determined at arrival and thus the exporter is the "absent party", the inspection certificate is, in most of the cases, issued at the request of the exporter, who wants his interests to be protected at destination.
• Governments may require a certificate of conformity of the merchandise being imported to make sure that the merchandise really exists and is in conformity with the sales contract and with the price stipulated in the contract. This method is usually used by governments for foreign exchange controls, taxes and import duties (including under or over invoicing to escape capital controls).
• It is important to verify the authenticity of the inspection certificate by calling the inspection company, in particular when one has any doubts about a particular element in the document. It is always advisable to receive the original copy of the inspection document. However, since only one original copy is available, one should always verify the authenticity of the copy received and should require a certification on the copy. The original is difficult to forge. It is usually the copy of the certificate which is forged, i.e. changes in the certificate number, adjustment of figures and payment on the fax copy received.
• Another risk of fraud is that the cargo is changed after inspection: the cargo inspected did not go into the ship.
• The cost of the pre-shipment inspection is usually borne by the government of the importing country, but it can also be covered by the buyer since some countries require in their laws that the buyer must cover the cost of inspection. Other countries do not require an inspection certificate for certain commodities, e.g. minerals. As to the cost of the commercial inspection certificate, it can be covered by the buyer and/or the seller (the cost of inspection can be incorporated in the letter of credit).

Insurance Certificate

There are generally two types of loss in a sales contract; the loss that can result from damage to goods in transit, and the loss generated by non-performance of the contract.

While damage or loss may be fully or partly covered by the insurance coverage, the contractual obligations of the seller to deliver the right merchandise on time at the right place, and the obligation of the buyer to accept the delivered goods, remain vital and enforceable.

The seller should not rely on the shipment insurance to get coverage for work not properly done (poor packing for example can lead to spoilage of goods). At the buyer’s end, the buyer may be reimbursed under shipment insurance but he will end up with a product of poor quality which may be very difficult to re-sell (if the buyer is buying under an FOB or FCA, he is obliged to pay upon proper presentation of the required documents, and then can turn to the insurance company to claim reimbursement). On the other hand, the buyer may refuse to accept the damaged (or late) shipment and refuse to pay the agreed price. This would be a reason for the buyer to sue the seller and claim indemnities for an amount beyond the value of any damaged or lost goods.

There is often no point in replacing a lost or damaged shipment by a new one if the buyer is no longer interested. A classic example of this is lost or damaged shipments of Christmas trees or Christmas turkeys, which can be replaced only if a second shipment is guaranteed to arrive well before Christmas day. There are many other similar cases where either the seller no longer has an interest in replacing a lost shipment of the same quantity, quality and price, or the buyer no longer has an interest in receiving it. And even if the buyer still wants to replace a shipment, the seller may suffer a loss because, in turn, he may not be able to meet his contractual obligations, or the buyer may have to suffer a loss or additional production costs if the lost or delayed shipment he was expecting is of raw materials for production.

The insurance certificate (referred to as marine cargo insurance) is a document certifying that the goods are insured for shipment and therefore covered for losses and damages during shipment. It is prepared before the shipment of the goods, and provides confirmation as to the type and amount of insurance coverage on the cargo. It is a requisite for any international trade transaction to have insurance coverage since international shipments represent a high degree of risk. Bad weather conditions, rough handling, and other common perils to shipment make marine insurance an important protection for exporters and importers. The long distance shipment, the prolonged transit time, and the transportation by more than one carrier which in turn means many loadings and unloadings, lead to extensive possibilities for goods to be easily damaged or lost. Marine insurance is therefore needed by importers, exporters and freight forwarders, to transfer risk of loss and gain protection against physical loss, damage or spoilage and delays in transit:

• Arrangements for marine insurance may be made by either the buyer or the seller, depending on the terms of sale. Further information on how to make such an arrangement can be provided by international insurance companies, freight forwarders or carriers. The undertaking of a marine cargo insurance policy or certificate, in addition to the security provided under a carrier's contract of carriage, enables a party to claim directly to the insurance company rather than to the carrier for any damages or losses. As to the carrier's liability in marine insurance, it is usually determined by international agreement. If by contract the carrier is determined to be liable, the indemnity payable by the carrier is then limited to his legal maximum liability amount. In some cases, the carrier may not even be liable at all because of the protection he can get from his legal exoneration or exceptions.
• If the terms of sale make the exporter responsible for insurance, he may either provide his own marine cargo policy or he can purchase it through his freight forwarder for a fee. This service would be useful for the occasional exporter. But, generally speaking, large exporters and importers do have their own marine cargo policies from insurance companies and it is also recommended for small exporters to have their own insurance. If the terms of sale make the foreign buyer responsible, he should provide his own policy from an insurance company or he can get it through customs brokers. In any case, the exporter should make sure that adequate insurance has been obtained. The exporter should be able to supply the necessary shipment information on time so that his buyer can take out insurance before the shipment voyage starts. If the buyer omits to obtain coverage or obtains too little, damage to the cargo would lead to significant financial loss to the exporter.
• As to the cover range, one should take into account the type of cargo and the shipping route used. There are normally two primary ways to obtain cargo insurance; one is a separate insurance policy for each shipment (one time policy), the other is continuous coverage of all shipments (open insurance policy). In the latter case, the exporter does not have to prepare a separate policy; an insurance certificate or declaration is supplied to him by the insurer. At the end of each pre-determined period (usually a month), the exporter will supply the insurer with all the shipments made during that period. Among the elements that will influence the insurance coverage are the value and standard of the cargo, the packing and handling, the standards of its preparation as well as the reputation of the agent involved in its dispatch, carriage, and receipt. As to the type of insurance, although marine cargo insurance can be custom made, risk coverage can be classified in three basic risk levels with different uses of coverage level:

All Risk - the broadest and most common coverage which usually excludes; delays, deterioration, loss of use and/or market (seasonal merchandise such as Christmas trees), inherent vice, strikes, riots, and civil commotion, capture, seizure and war.

War Risk - covered under a separate policy or by endorsement. Includes perils of war, but generally excludes delay, loss of market, and deterioration. An exception can be made in the case of air freight shipments, mail and parcel post. Coverage is in effect only while goods are Airborne or Waterborne. If the country to which goods are expedited constitutes a war risk, which is excluded from the standard coverage, then additional premiums may be required to cover political risks (delays or seizure).

Warehouse to Warehouse - coverage begins upon movement of goods from the shipper’s warehouse and continues through the course of transit to the consignee’s warehouse.

• In order to avoid delays and problems/losses in the event of a claim, the insurance certificate has to be presented in the form stipulated in the letter of credit and must contain:

The actual amount of insurance (the value covered should be properly calculated to make sure it covers all costs assumed by the insuring party - such as freight, inspections, and certificate of origin costs);

The date of issue (the date of issue must be the same as or earlier than the date of the transport document - i.e. the date of loading on board or dispatch or taking in charge of the goods; a later date of issue is acceptable only if it is expressly stated in the letter of credit);

The currency used (unless otherwise stipulated in the letter of credit itself, insurance coverage must be in the same currency as the letter of credit);

Proper description and commercial value of insured goods (the goods description must be consistent with what is stipulated in the credit and on the invoice);

Correct marks and numbers (i.e. as described in the documents - packing list -related to the shipment);

Name of vessel or flight details;

Full description of the voyage covered by the insurance (i.e. the place where insurance is to start - the seller’s warehouse or port/airport of loading - and the place where insurance ceases - port/airport of discharge or buyer’s warehouse);

Name and address of the beneficiary;

Name of the agent who would be authorized to settle the claims and whose name is supplied by the insurance company and place where claims are payable.

• The insurance policy should cover transhipment in case transhipment is part of the trade transaction.
• Insurance documents must be in the form stipulated in the credit and be issued and signed by an insurance company, an underwriter, or its agent. Unless otherwise stipulated in the credit, the insurance cover must be expressed in the same currency as the credit and must cover at least the CIF or CIP value of the goods plus 10%. If, on the basis of the documents, this minimum value cannot be determined, the basis for the amount will be the gross amount of the commercial invoice or the amount to be paid under the letter of credit, whichever is greater. For example, when bankers cannot determine the CIP or CIF values from the documents presented against a letter of credit, they will accept insurance at 110% of the amount to be paid under the letter of credit, or 110% of the gross amount of the commercial invoice, whichever is greater.
• Similar to the bill of lading, the insurance document is normally issued in a “negotiable form” which means that the party in whose favor the document has been issued (usually the seller but it may be the seller’s agent) must endorse it “in blank”. Some documentary credits require the endorsement to be made to the order of a named party (typically the buyer or the issuing bank). Claims under the policy can only be submitted by a party in whose favor the document has been issued or endorsed.